We are entering into a week full of heightened expectations. Though there have been many similar weeks during last 19 summits since Euro crisis started, this is especial as stakes are high.
As we approach Sept 12 and 13th, some traders and investors around the world might be thinking “Will there be QE3? Should I be buying stocks now? Or should I be selling since the markets have already shot up so much?”
While these are valid questions, I think experienced traders would be asking a different set of questions:
- Given my style of trading, if QE3 really happens, what kind of market setups will give me a low risk trade?
- How will different market setups affect how long I want to stay in the trade?
- If there is no QE3, how are the markets likely to react? In such circumstances and in the context of my trading style, what kind of low risk setup will interest me?
While both groups of traders are keen on potential trading opportunities, the latter is more interested in low risk trades based upon their trading methodologies and past experiences/ lessons. There is an understanding that different methods work in different market conditions and in any given time, the presence of favorable conditions is not a given. It is with this understanding of the relationship between method and market conditions, and the requirement for low risk opportunities that prevents the good traders from chasing trades and placing large bets preemptively.
This is also why we often read that well known traders plan before they place a trade. Contrary to popular belief and literature on the subject, trade planning is not just about placing of stop loss, determining profit taking levels, position sizing and how much to risk. Well known traders have various scenarios in their head and they plan before hand what they are going to do for each one of them so that they may limit risk and when the opportunity arises, to maximize profit.
Regardless of whether QE3 comes or not, it will be a good opportunity to observe how we think and how we trade. And in the end, in the long run, what will become more important than picking up trading profits is picking up lessons that make us a better trader.
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Careful Trading, Ethan